A big deal is made out of the fact that more than three quarters of Bitcoins are not in circulation. Only about 28% are used in transaction. Now, ignoring the fact for a moment that perhaps a large proportion of the 28% are being moved between addresses held by the same people, and are therefore not really being used (a bit like a multi-millionare moving his or her funds between bank accounts), is this "hoarding" really a problem?
Well, this Wikipedia page claims that the top 5% of Americans hold over 50% of the wealth. Presumably they're sitting on most of it - so over half of American wealth is being hoarded. And the top 20% hold 85%, which is remarkably close to the Bitcoin hoarding figures.And yet the US economy keeps ticking over nicely.
Suddenly Bitcoin hoarding doesn't seem like so much of a problem to me.
Friday, April 5, 2013
Thursday, April 4, 2013
News articles about Bitcoin
I find myself googling daily for news articles on Bitcoin, usually in the evening when there's nothing interesting on television.
The problem is that most articles tick one or more of the following annoying habits:
The problem is that most articles tick one or more of the following annoying habits:
- Reporters who puts the something similar to the following sentences in the first paragraph: "Bitcoin is a decetralized peer-to-peer cryptocurrency" and then proceed through various clueless statements to indicate that they have no idea what Bitcoin is really about.
- Articles with the sentence, "They can be used to buy anything from socks to drugs" in them. No doubt in a year's time it will be "They can be used to buy anything from socks to drugs, to even houses and sports cars."
- Stories that focus entirely on the fact that "Bitcoin has risen spectacularly to $xxx" or "Bitcoin has suffered a crushing collapse back to $yyy." You can almost guarantee that by the time you see the story the opposite has since happened.
- Those "Ho ho ho, I have no idea what these things are, and I have no interest in finding out given that I barely managed to scrape together a degree in the Liberal Arts and they seem to involve mathematics and computers, but my editor has given me 200 bucks to try them out, so here goes..." stories.
- Articles that claim that the current boom in Bitcoin is entirely due to the threatened bank account tax in Cypress that never materialised.
No doubt more will be added to the list as time goes on.
Intrinsic value? Fundamentals? Utility? Do these terms make any sense in relation to Bitcoin?
In a recent Bitcoin article I read that one Chris Cook, a senior fellow at UCL’s Institute for Security and Resilience Studies is claimed to have stated[1]: " Since it has zero utility (use value over time), the intrinsic value of bitcoin is zero."
What does this sentence mean?
From Wikipedia: "In finance, intrinsic value refers to the actual value of a company or stock determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value."
Hmm. How about utility? Wikipedia again: "In economics, utility is a representation of preferences over some set of goods and services."
And fundamental analysis? "Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets."
But Bitcoin is not a business, aiming to increase shareholder value through gaining competitive advantages over its competitors and markets. The jargon in all these statements applies to the economics of businesses.
Try looking at it this way:
"Since it has zero utility (use value over time), the intrinsic value of language is zero."
"Since it has zero utility (use value over time), the intrinsic value of music is zero."
"Since it has zero utility (use value over time), the intrinsic value of algebra is zero."
Those sentences make no sense either? But does anyone really think that words, music, or mathematics have no value? Bitcoins aren't businesses. They're like the http web protocol, or asymmetric key cryptography - a tool. They just happen to be a tool with a clear dollar price attached to them.
And now imagine that only 21 million people in the whole world were able to use words, or write down chords and notes, or were able to solve quadratic equations (actually, that last one might be true). With such scarcity, the value of language, music and algebra would be astronomically higher. Possibly as high as $5,000 or $50,000 dollars per word/note/equation even.
[1] I can only find two references on the web that he actually said this, so perhaps he didn't.
What does this sentence mean?
From Wikipedia: "In finance, intrinsic value refers to the actual value of a company or stock determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value."
Hmm. How about utility? Wikipedia again: "In economics, utility is a representation of preferences over some set of goods and services."
And fundamental analysis? "Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets."
But Bitcoin is not a business, aiming to increase shareholder value through gaining competitive advantages over its competitors and markets. The jargon in all these statements applies to the economics of businesses.
Try looking at it this way:
"Since it has zero utility (use value over time), the intrinsic value of language is zero."
"Since it has zero utility (use value over time), the intrinsic value of music is zero."
"Since it has zero utility (use value over time), the intrinsic value of algebra is zero."
Those sentences make no sense either? But does anyone really think that words, music, or mathematics have no value? Bitcoins aren't businesses. They're like the http web protocol, or asymmetric key cryptography - a tool. They just happen to be a tool with a clear dollar price attached to them.
And now imagine that only 21 million people in the whole world were able to use words, or write down chords and notes, or were able to solve quadratic equations (actually, that last one might be true). With such scarcity, the value of language, music and algebra would be astronomically higher. Possibly as high as $5,000 or $50,000 dollars per word/note/equation even.
[1] I can only find two references on the web that he actually said this, so perhaps he didn't.
Wednesday, April 3, 2013
How safe is your wallet?
Something that must be giving those who hold large quantities of Bitcoin nightmares is the fear of losing them (although I wish I had enough to warrant such nightmares!). Unlike a standard bank account, if you lose your Bitcoins then they tend to be gone. Transferring them to the wrong address, losing your private key, or having your machine hacked and the coins transferred out by a thief to their own address are things that have all happened to some Bitcoin holders out there at some point. So what can you do?
1. For the least paranoid, and those with not much to lose, or without much technical knowledge - sign up to a third party wallet service such as blockinfo.com, or keep your coins in an exchange such as mtgox.com or intersango.com. If you pick a good login password, and the site remains reliable, you'll be fine. And if you forget your password the last two of these sites will send a new one to your registration address.
2. If you're slightly more paranoid, or don't want to give control to a third-party service, install the Open Source Bitcoin Client - see bitcoin.org for details. Then you're trusting the developers of the client that they're reliable and thorough. In the past they didn't encrypt the wallet.dat file with their program, so it just sat on your machine in plain sight, and as a result anyone with physical access to your computer or anyone who managed to get a trojan program onto it could steal them, and the latter did indeed happen. The developers expected people using their code to have enough technical knowledge to encrypt the key file themselves, which turned out not to be the case. Who knows what the next loophole that thieves will exploit might be?
3. Going up a notch - use a site like bitaddress.org or the vanitygen program (google it) to generate your public bitcoin address and associated private key, print it out, and store it somewhere safe. Move any coins you mine or buy to that address as a relatively secure holding place. Hope that there isn't a back door that posts your private key back to the original developers.
4. One step further - as for suggestion 3, but disconnect your computer from the internet after downloading the code. And hope that the developers of the site or program haven't done something like ensure that it generates a limited subset of private keys which can be tried out simply by a brute force attack - this leads to ...
5. As for 4, but then learn to program and review the code yourself to feel truly secure.
Of course, you could buy a laptop, never connect it to the internet, write your own key generating software, and use that to create your keys. And lock the computer in a safe when you're finished, after copying the public address out by hand and loading your coins onto it. But then you'll always have to worry that you made a mistake in your code, and the wrong public address was generated.
Oh what a problem it must be to hold thousands of Bitcoins!
1. For the least paranoid, and those with not much to lose, or without much technical knowledge - sign up to a third party wallet service such as blockinfo.com, or keep your coins in an exchange such as mtgox.com or intersango.com. If you pick a good login password, and the site remains reliable, you'll be fine. And if you forget your password the last two of these sites will send a new one to your registration address.
2. If you're slightly more paranoid, or don't want to give control to a third-party service, install the Open Source Bitcoin Client - see bitcoin.org for details. Then you're trusting the developers of the client that they're reliable and thorough. In the past they didn't encrypt the wallet.dat file with their program, so it just sat on your machine in plain sight, and as a result anyone with physical access to your computer or anyone who managed to get a trojan program onto it could steal them, and the latter did indeed happen. The developers expected people using their code to have enough technical knowledge to encrypt the key file themselves, which turned out not to be the case. Who knows what the next loophole that thieves will exploit might be?
3. Going up a notch - use a site like bitaddress.org or the vanitygen program (google it) to generate your public bitcoin address and associated private key, print it out, and store it somewhere safe. Move any coins you mine or buy to that address as a relatively secure holding place. Hope that there isn't a back door that posts your private key back to the original developers.
4. One step further - as for suggestion 3, but disconnect your computer from the internet after downloading the code. And hope that the developers of the site or program haven't done something like ensure that it generates a limited subset of private keys which can be tried out simply by a brute force attack - this leads to ...
5. As for 4, but then learn to program and review the code yourself to feel truly secure.
Of course, you could buy a laptop, never connect it to the internet, write your own key generating software, and use that to create your keys. And lock the computer in a safe when you're finished, after copying the public address out by hand and loading your coins onto it. But then you'll always have to worry that you made a mistake in your code, and the wrong public address was generated.
Oh what a problem it must be to hold thousands of Bitcoins!
Block mining delays and price drops
I noted tonight that there were two large price drops on Mt Gox - on around 18:50 to 19:00 (130 dollars down to 120 dollars), and another at 20:30 (from 125 dollars to 115 dollars). Coincidentally at the same time, there were significant delays in the verification of blocks at those times - in the first case it took 23 minutes between blocks (usually it's 9 to 10 minutes), and in the second case a whopping 28 minutes.
I wonder if the delay in verification causes the price drop? It might be worth keeping an eye on.
Update: no, it seems to be linked to a DDoS attack on Mt Gox. This is why having one exchange dominating Bitcoin trading is a bad idea.
I wonder if the delay in verification causes the price drop? It might be worth keeping an eye on.
Update: no, it seems to be linked to a DDoS attack on Mt Gox. This is why having one exchange dominating Bitcoin trading is a bad idea.
Tuesday, April 2, 2013
How fast should Bitcoin be rising?
I keep coming up with a lower estimate for the value of a bitcoin of about $5,000, and upper limits of around $50,000 (see previous posts). A very simple calculation based on the assumption that Bitcoin should hit its stable value in a decade results in a minimum rise of ten dollars a week.
Suddenly the rapid rise in Bitoin prices doesn't seem so crazy...
Suddenly the rapid rise in Bitoin prices doesn't seem so crazy...
Monday, April 1, 2013
Bitcoin comparison with Visa
Some time in the (hopefully not too) distant future, Bitcoin could well rival payment card systems such as Visa and Mastercard - especially if simpler Bitcoin payment systems are developed. This means that we can produce estimates of what Bitcoin should be worth when mining rewards are reduced and the incentive to participate in the blockchain validation process is based more on transfer fees and less on the mining reward.
A quick search online shows that Visa, for example, made $2.73 billion last year in revenue. Presumably most of this came from the 2-3% payment charge they levy on each card transaction. If we make a few "back of an envelope" calculation assumptions - the sum of the 0.1% transaction charges for Bitcoin could be as much as $150 million a year at some point. At about 50,000 block verifications a year, that comes to an average of $3000 verification rewards per block, on $3 million's worth of transactions every block.
At the moment most Bitcoins appear to be being held, or traded on exchanges. If Bitcoin is to become adopted as a form of currency rather than a speculative asset, then lets make the modes assumption that 10% of Bitoins circulate in any one year, covering the same movement of cash as Visa currently does. That's about $150 billion a year according to my calculation. (There is a flaw in the assumption that follows) So 10% of Bitcoin could be worth $150 billion, making the total market cap of Bitcoin $1.5 trillion.
That would value one Bitcoin at about $70,000.
A quick search online shows that Visa, for example, made $2.73 billion last year in revenue. Presumably most of this came from the 2-3% payment charge they levy on each card transaction. If we make a few "back of an envelope" calculation assumptions - the sum of the 0.1% transaction charges for Bitcoin could be as much as $150 million a year at some point. At about 50,000 block verifications a year, that comes to an average of $3000 verification rewards per block, on $3 million's worth of transactions every block.
At the moment most Bitcoins appear to be being held, or traded on exchanges. If Bitcoin is to become adopted as a form of currency rather than a speculative asset, then lets make the modes assumption that 10% of Bitoins circulate in any one year, covering the same movement of cash as Visa currently does. That's about $150 billion a year according to my calculation. (There is a flaw in the assumption that follows) So 10% of Bitcoin could be worth $150 billion, making the total market cap of Bitcoin $1.5 trillion.
That would value one Bitcoin at about $70,000.
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